Clif Droke reports what role Gold played in the Panic of 1907.

In the summer of 1907, a major economic shock hit the American capital markets. In an effort to harbor gold reserves, the bank of England imposed a prohibition on U.S. finance bills, which were loans with which U.S. firms could import gold. The contemporary economist, O.M.W. Sprague, considered this action ‘the most important financial factor in the panic of 1907.' The prohibition slashed the volume of finance bills in the London market from $400 million to $30 million by late in the summer of 1907. This meant that American debtors could not simply refinance their obligations in London. As a result, the flow of gold to America suddenly lurched into reverse as gold was remitted to London to settle the payment on finance bills. This further contracted U.S. gold reserves nearly 10 percent between May and August 1907 and contributed to a national liquidity drought.

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